Section 158 of the Income Tax Act, 2025 provides special tax treatment for income accrued in retirement benefit accounts maintained in notified countries. Rule 74 of the Income Tax Rules, 2026 allows the assessee to elect the timing of taxation of such income. Understanding this election is essential for persons with retirement accounts in foreign countries.
The Statutory Framework
Section 158: Relief from Taxation in Income from Retirement Benefit Account
Section 158 provides that the income accrued to a specified person in a specified account shall be taxed in such manner and in such tax year, as may be prescribed.
Specified Person: A person resident in India having opened a specified account in a notified country while being non-resident in India and resident in that country.
Specified Account: An account maintained in a notified country by the specified person for his retirement benefits, the income from which is taxed by that notified country at the time of withdrawal or redemption and not on accrual basis.
Notified Country: A country as may be notified by the Central Government.
Rule 74: Taxation Election
Rule 74 allows the specified person to elect to include the income accrued in the specified account in his total income of the tax year in which income from the said account is taxed upon withdrawal or redemption in the notified country.
The Taxation Election
Option to Elect
If a specified person has income accrued in a specified account or accounts during a tax year, such income shall, at his option, be included in his total income of the tax year in which income from the said account or accounts is taxed upon withdrawal or redemption, as the case may be, in the notified country.
Effect of Election
Where the option has been exercised by a specified person, the total income of the specified person for the tax year in which income is taxable shall not include the income which:
- Has already been included in the total income of such specified person in any of the earlier tax years during which such income accrued and tax thereon has been paid in accordance with the provisions of the Act
- Was not taxable in India, in the tax year during which such income accrued, on account of:
- Such specified person being a non-resident, or not ordinarily resident as referred to in Section 6(13), during that tax year
- Application of the Double Taxation Avoidance Agreement, if any
Foreign Tax Credit
The foreign tax paid on such income, if any, shall be ignored for the purposes of computation of the foreign tax credit under Rule 76.
Exercise of Option
Form 40
The option under Rule 74 by the specified person shall be exercised:
- In respect of all the specified accounts maintained by the specified person
- In Form No. 40
Filing Deadline
Form No. 40 shall be furnished on or before the due date specified under Section 263(1)(c).
Irrevocability
Once the option is exercised for a specified account or accounts in respect of a tax year under Rule 74 in Form No. 40, it shall apply to all subsequent tax years and cannot be subsequently withdrawn for the tax year for which the option was exercised, or for any subsequent tax year.
Change in Residential Status
Becoming Non-Resident
Where the specified person becomes a non-resident during any relevant tax year:
- The option exercised under Rule 74 shall be deemed to have never been exercised with effect from the relevant tax year
- The income which has accrued in the specified account or accounts during the period, beginning with the tax year in respect of which the option was exercised and ending with the tax year immediately preceding the relevant tax year, shall be taxable during the tax year immediately preceding the relevant tax year
- Tax shall be paid on or before the due date of filing the return of income for the relevant tax year
Practical Implications
For Specified Persons
- Consider whether to exercise the election
- If elected, maintain records of income accrued and tax paid
- Monitor changes in residential status
For Tax Practitioners
- Advise clients on the election
- Assist with Form 40 filing
- Manage the impact of the election on foreign tax credit
Expert Legal Guidance
Understanding the taxation election for retirement benefit accounts in notified countries is essential for persons with foreign retirement accounts. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers navigate the election and ensure compliance with all requirements.